[Volume XXV
THE CHICAGO BANKER
18
the tax, no man can tell what it would be. Insurance is based on known risks for which the insured pay in proportion to liability of loss. This measure in effect makes every bank liable for the deposits in all other banks without any power whatever to control them. It virtually makes every banker take into partnership every man in the banking business or who shall elect in the future to enter it.
predict that the United States Supreme Court will so hold it. Where is the justice or equity in compelling men to pay losses for which they are in no way responsible and of which they have no previous knowledge ?
But they say this is merely compulsory insurance, the tax will be so small that it will scarcely be felt. I say this proposition violates every principle of insurance; and as for the amount of
of deposits. So far as its standing with the public is concerned it matters not who are its organizers, who is to conduct its affairs, or what its capital and surplus may be. There would be no reason for building up a surplus. In fact a weak institution would have a competitive advantage over a strong one. This proposition is unsound from a legal and constitutional standpoint, for it is nothing less than confiscation of property and I
Harold W. Dorn Speaks for Chicago Chapter
safety to the oldest and most conservative bank in the state. In the second instance, do you not see the fierce and ruinous competition entailed by a multiplication of banks? Even in that new country how can a banker pay 8 per cent on any deposits end while making money, invest his funds safely? He must take long chances and he is willing to, as he can at the same time assure his depositors of their safety. In the third case cited, do you not see the opportunity for political alliance in banking, which is now prevented in our national system of individual units by the interest of the depositor in the integrity of the management of his bank ?
If this law were enacted for the entire nation, would we not infallibly have the same lowering of the present high standard, the same increase in risk and speculation, the same injection of politics? Why should I care where my deposit is except in so far as I am offered special inducements? All banks in this beautiful theory are absolutely safe depositaries. Why should I not prefer our friend who pays 8 per cent to the banker who pays half as much and has only a life long reputation for trained banking skill and absolute integrity? Will not such a law in either Oklahoma or the entire nation take business from the conservative and place it in the hands of the incompetent and the dishonest? And then finally when the fair weather banker has failed, his conservative neighbor, at whose expense he has thriven, must pay his losses, or rather the depositors of the sound bank must pay the losses.
And finally, have they in Oklahoma an absolute protection? True they have a guaranty fund of i per cent of their total state deposits. And this, remember, is a tax of approximately 6 per cent on capital, and not an expense item to be laughed at by the banker large or small. But this fund could be more than wiped out by the failure and partial loss of two of their large banks. Indeed, a guarantee fund! In time of panic, how much assurance is it to the trembling depositor that his security is increased by a fund which adds but a small percentage to the protection of the combined capital and surplus of the banks? And you could not replenish that fund by a levy on the hard pressed banker in a financial stringency. The point is this, you have imposed an added burden on the banker, and you have not made loss impossible after all. Far from it!
If we worked out this scheme in our national system we could raise by a tax of i per cent some $60,000,000. And incidentally this tax which includes additional levies over 1 per cent as needed, would discourage investment by the conservative and would attract only those whose looser methods would reward them with larger returns on their capital. But what would we do with our $60,000,000? Invest it in bonds, you say, where it would be subject to shrinkage when most needed, and where it could not be turned at all in time of panic without great loss. Or, the only safe way, put in safe deposit vaults or with the U. S. Treasurer. Then it is available when needed, but you would lose each year in interest some $3,000,000. This is the actual loss, would you in return ensure absolute safety.
The second debater on the negative of the guaranty question at Indiana bankers convention reads a fine paper ::	::	::
surance fund in the national system, and the stockholders will be influenced to distribute the remaining undivided profits in dividends to themselves. Is there any reasonable doubt
HAROLD W. DORN
Chicago
that a national■ application of this law would inevitably result in the reduction of capital and the distribution instead of the accumulation of surplus ? The guaranty would throw up an artificial barrier behind which banks could protect their own weakness. They would be content to remain on the lowest level possible with solvency.
In the third place, the Oklahoma law is lowering the standard of banking in that state. It is encouraging speculation and permitting politicians to enter the banking business. Here are three instances; in one case a man who has failed twice before is under the new law starting a string of 15 new banks throughout the state. His bank in Oklahoma City with $25,000 capital has already over $100,000 deposits and he is starting the fifth bank in Mangum, a town of less than 2,000 souls. In another case, a banker offered 8 per cent on deposits of fraternal orders, and when reprimanded by the state commissioner, offered to pay the difference between the legal rate of 3 per cent and his promise, out of his own pocket. Governor Haskell’s son is cashier of a new state bank in Muskogee which advertises in Gov. Haskell’s own newspaper “All deposits guaranteed by the state.” Do you not see in the first instance, the opportunity for the mushroom, vest-pocket bank, “backed” by the utterly incompetent and unscrupulous? Yet such a bank is theoretically equal in
My colleague who has already spoken has shown that a system of guaranty of deposits is utterly wrong in principle. Such being the case, we do not need additional grounds to warrant us in discarding the proposition. Merely to show other important reasons for the opposition of thoughtful men to deposit insurance, we will assume that it is right in theory, and then show that it is wrong in practice.
Insurance of bank deposits is only a theory as yet in so far as national application is concerned. The only previous trial that the scheme has ever had was under the safety fund law in New York in the years following 1829. Though differing greatly in detail, the insurance principle was the same as in this proposal. The result in New York was careless banking, the bankruptcy of the fund, and the abandonment of the scheme, which is precisely what we maintain would follow to-day.
The trial of the scheme in Oklahoma is only beginning. But it has been in existence nearly a year and we can show some of the actual results of the plan on the testimony of the bankers of that state. We are opposed to the guaranty of bank deposits because of these facts, which I shall briefly state.
In the first place, the guaranty law is increasing the number of banks beyond any reasonable calculation of profitable investment. In the town of Prague, which with a population of 998 is already blessed with three banks, they are starting a fourth. The state bank commissioner sought to enjoin its establishment but the judge ruled that the fact that the other banks in town protested, or that the applicants were inexperienced in the banking-business mattered not at all as long as the incorporation papers were properly made out.
The inexperienced banker, unknown in the community, seizes the opportunity because, with the law on his side, guaranteeing all deposits, he can compete on even terms with the old established banks, whereas in other states the new banker must fill a need for additional facilities and inspire the confidence of the community by his own character before he can be successful. 47 new state banks have been established in Oklahoma in the few months since the panic. Is there any possible reason to suppose that a national deposit guaranty law would not also lead to the rapid multiplication of new banks by both the inexperienced and the dishonest?
In the second place, the Oklahoma law is lowering the capital to the absolute minimum required by law and discouraging the accumulation of surplus. Practically all the 12 national banks who have surrendered their charters have at the same time reduced their capital. Of what value is large capital in the eyes of the depositor? The state now supplies the reserve which guarantees his funds. With the additional tax which is levied for the fund as a drain on profits the capital ought to be smaller to yield the same dividend to the stockholder. In the same way, there is no reason for strengthening the bank by the accumulation of surplus. Both the tax itself and the more reckless bidding for deposits, will deplete this surplus, which now serves as an immense in-